A company sells a product for $200,000 on credit. The terms are 2/10, net 30. The company expects 70% of customers to take the discount. Using the net method for recording sales discounts, how much revenue should the company initially recognize?
- A$197,200
- B$198,800
- C$196,000
- D$200,000
Show answer & explanationAnswer & explanation
Correct answer: C. $196,000
Under the net method, sales revenue is initially recorded at the amount expected to be received after considering the sales discount. The discount offered is 2% of $200,000, which is $4,000. The net revenue is $200,000 - $4,000 = $196,000. The expectation of 70% taking the discount is only relevant if using the gross method, where a contra-revenue account for expected discounts would be established. For the net method, revenue is recorded net of the maximum possible discount, assuming all customers take it, and an adjustment is made if customers *don't* take the discount.
Why the other options are wrong
- A. This is an incorrect calculation, possibly attempting to apply the 70% to the discount and then subtracting.
- B. This would be incorrect, perhaps trying to factor in the 70% expectation in a misapplied way.
- D. This would be the initial recording under the gross method, before considering any discount.
Net Method (Sales Discounts)
A method of accounting for sales discounts where revenue is initially recorded net of the maximum possible discount, assuming the customer will take the discount.
- Revenue initially recorded at sales price less discount.
- If customer takes discount, no further entry is needed for the discount.
- If customer does NOT take discount, an additional revenue (or 'Sales Discount Forfeited') is recognized.
Memory trick: Sales Discount: Gross or Net, How Much Will You Get?